Is this too tight of a deal?

Question

Can you please take a look at my number crunching and see if mathematically I made any mistakes when trying to determine CAP, COC, and Total ROI? This was a great read and really helped me out! I know these valuations are more for multiunit buildings, I was trying to create a system of comparing “apples to apples” if I look elsewhere.

http://www.biggerpockets.com/renewsblog/2010/06/30/introduction-to-real-estate-analysis-investing/

I am being very conservative for my expenses and I know it shows, but is this deal too tight? The house is in a great market and if I can get it a little under list price, add in all the renovations I should still be about 20K undervalued, next to all the comparables in the neighborhood.

Matt Schelberg · Answer

One thing I noticed... your reserves for replacement are too high becuase you base depreciation on "remaining life" rather than total expected lifespan.  So you are budgeting to replace the roof and HVAC every 10 years.  This is almost certainly too short for the roof, and probably too short for the HVAC.

Even if the roof only has 3 years left, this is a one time expense to replace, not something you would need to do every 3 years.

Adjust the expected roof lifespan to 20 or 30 years and you will have a more accurate estimate of expenses.  Might bump up your cashflow 20 or 30 bucks per month.

One question: What are property taxes and where are these represented in your numbers?

Stephen Collins · Answer

Matt  Schelberg  The house was built in 2002. I agree a roof will last for about 20 years. 20(average)-12(time already spent) leaves me about 8-10 years before I plan on spending the $5,000 for the roof.

Property taxes, along with insurance, and mortgage were totaled into "monthly housing expense" and subtracted from the monthly operating income leaving me with monthly cash flow.

Sharad M. · Answer

Great point about replacement life.

I think the Taxes and Insurance numbers are included in monthly mortgage of $494. P&I comes out to $335.

Sharad M. · Answer

@Stephen Collins

I am very heavily invested in the area and have built great a great team, so yes I would definitely stay in the area if I knew I was going to move next year.

As for other markets, honestly, I have never really looked at other markets. I used to live in NY before I moved to Chicago and I consider myself fortunate that I moved to Chicago, because of the investing opportunities that I have had in Lake County, Indiana. I wouldn't have had these opportunities in NY area.

My goal is to keep expanding my rental portfolio for retirement, so I want to be invested in a market that's landlord friendly and where I can get the best cash flow without investing in bad area. I can get both of those things in the area where I invest now.

Stephen Collins · Answer

@Sharad M.  Thank you, we all appreciate that!

I'll have check out Lake County. Would you still invest in that area if you knew work was going to move you next year? I assume you feel comfortable there and have built up a solid reputation, all the more reasons to stay. What markets outside of your city would you consider?

I have great job security. I budget my paycheck and save my pennies for a down payment. I am trying to build a nest egg of buy and hold rentals for when I retire.

Sharad M. · Answer

@Stephen Collins

Firstly, thanks for everything you do as member of the Armed Forces.

And it's great that you have geographic flexibility. I would invest in NW Indiana (Lake County) because the market is 30-45 minutes drive from downtown Chicago, where I live.

Indiana is very landlord friendly and the rate of returns are much higher than what I can get in some of the other markets.

What are your long term RE goals?

Stephen Collins · Answer

@Sharad M.  I am very flexible with where I invest. I serve in the Armed Forces and expect to be moved around the country. I picked "hot markets" according to Forbes and found a connection to #3 Charlotte, NC and #4 Nashville, TN. I have been working with a realtor and this was one of the "better" investment properties she had in those areas. I am not so convinced. If you had free reign of the country what market would you invest in?

Stephen Collins · Answer

• List Price $85,000
• Target Purchase Price $80,000
• Cash P/I reserves need by bank, and closing costs $6,000
• Renovations $10,000
• TOTAL CASH OUTLAY $32,000

• CAP Rate 8.22%
• Cash Flow + Equity + Appreciation (3%) = $648 + $2133+ $2400 = $5180
• Total ROI = 5180/ 32000 = 16.2%

@Sharad M. @Jerry W.

Sharad M. · Answer

Stephen, you didn't make it easy to look at the numbers by posting them on Youtube :)

The numbers are too tight for what I can get in my market. What are your goals long term goals with this property?

Have you looked at other deals in your market to see what kind of returns you can get?

Jerry W. · Answer

Sorry Bud still too small hehe

Is this too tight of a deal?

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